Azerbaijani Central Bank’s refinancing rate to remain on hold over medium term

Photo: ING Group

BAKU, Azerbaijan, October 22. Azerbaijani Central Bank’s refinancing rate is expected to remain on hold over the medium term, the Dutch ING Group said in its latest report.

“Inflation risks have recently shifted somewhat to the upside, as food prices and higher global transport and commodity costs have renewed pressure on Azerbaijan’s producer price index. However, the exchange-rate peg remains a strong nominal anchor, limiting pass-through to consumer prices. With CPI still within the 4±2% target range, we expect the refinancing rate to remain on hold over the medium term,” the report reads.

However, according to ING analysts, further imported inflation linked to developments in the Middle East is the main upside risk, given Azerbaijan’s trade exposure to the eurozone and other economies sensitive to global cost input pressures.

“For now, further policy adjustment appears unnecessary unless price pressures become materially more persistent and tip the CPI sustainably above 6%,” says the report.

On September 23, the Central Bank of Azerbaijan kept its key rate unchanged at 6.5% and the upper bound of the interest rate corridor at 7.5%, while cutting the lower bound by 0.5 percentage points to 5%.

The decision on the parameters of the interest rate corridor took into account actual and projected inflation trends, developments in the foreign exchange market, changes in the banking sector’s liquidity position and recent trends in global monetary conditions.

The reduction in the lower bound of the interest rate corridor is aimed at encouraging trading in the interbank money market amid excess liquidity in the banking sector. The widening of the corridor is expected to encourage banks to conduct more active transactions among themselves by reducing the CBA’s participation in the money market.